Could U.S. Manufacturing Slump Signal a Downward Slide?

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Jeff Kowalsky / Bloomberg

A worker on the line at General Motors Flint Assembly in Flint, Mich.

Stocks are about 3.5% cheaper than they were a week ago, and for value-hungry investors, that number could go even lower this week once reality sets in.

That after the two big pieces of news that impacted the markets Monday – the debt ceiling agreement in Washington and a toxic U.S. manufacturing report from the Institute for Supply Management’s – have turned the financial markets on their head.

Weak manufacturing numbers seem to have trumped any good Mojo coming from the debt ceiling deal, as the ISM posted a reading of 50.9 — well below analyst expectations of 54.5, according to a Bloomberg survey of 80 U.S economists. The ISM recorded a 55.3 reading in June.

(MORE: 5 Things for Liberals to Like in Debt Ceiling Deal)

Manufacturing is a key cog in the U.S. economic engine, and any ISM reading of 50 or below signals economic contraction – a scenario that the already shell-shocked U.S. consumer would be loathe to recognize, let alone absorb.

But the ISM numbers may force consumers to do just that.

Says Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management Manufacturing Business Survey Committee:

“The PMI registered 50.9 percent, a decrease of 4.4 percentage points, indicating expansion in the manufacturing sector for the 24th consecutive month, although at a slower rate of growth than in June. Production and employment also showed continued growth in July, but at slower rates than in June. The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009, when it registered 48.9 percent. The rate of increase in prices slowed for the third consecutive month, dropping 9 percentage points in July to 59 percent. In the last three months combined, the Prices Index has declined by 26.5 percentage points, dropping from 85.5 percent in April to 59 percent in July. Despite relief in pricing, however, several comments suggest a slowdown in domestic demand in the short term, while export orders continue to remain strong.”

Loosely translated, Holcomb says that U.S. manufacturing is slowing, new orders are at two-year lows, and that from a competitive standpoint, Beijing is a better bet than Baltimore or Boise for U.S. companies looking for customers.

(MORE: Global Manufacturing Slump: Doom for the Economy?)

Across the board, manufacturing numbers look dim. The ISM released a sector-by-sector “rapid response” to the July number, as reflected below:

  • “Inflation pressures have finally slowed down.” (Chemical Products)
  • “With products sold internationally, the business conditions we are currently experiencing are declining from abnormally [high] record-breaking levels. Business conditions are currently flattening to more normal volumes, while trending slightly downward.” (Machinery)
  • “Market conditions — Europe weak, U.S. soft, Asia strong.” (Computer & Electronic Products)
  • “Demand from automotive manufacturers continues to improve.” (Fabricated Metal Products)
  • “Export sales very strong, while domestic sales are sluggish.” (Paper Products)
  • “The looming debt ceiling has government agencies backing away from spending. Forecasting a slowdown in demand in the short term.” (Transportation Equipment)
  • “Generally seeing a slowdown, which is typical this time of year. Hopeful that this is seasonal only.” (Plastics & Rubber Products)
  • “Most industrial customers seem to be sustaining their business. Export orders continue to remain strong. Price pressures persist, especially with commodity materials.” (Chemical Products)

So what does a lousy manufacturing number mean for consumers? Here are a few key takeaways:

Potentially more layoffs — When manufacturing slows, companies hold the line on new hires, or worse, commence with a new round of layoffs (like Boston Scientific did last week).
Lower stock prices, higher bond prices – When manufacturing slides, Wall Street heads to the hills, or more accurately, to safe havens like the U.S. Treasury market, where returns – as small as they may be – are guaranteed by a suddenly flush Uncle Sam.

Less spending by businesses and consumers – With demand for consumer goods down, businesses and consumers tend to hunker down and wait for those elusive “green shoots” that economists have pretty much stopped talking about.

Lower manufacturing could mean lower growth in your neck of the woods — Manufacturing and regional economic growth are bound together like a barnacle to the hull of a boat. It’s no coincidence that with U.S. companies slowing production, eight of the 12 U.S. cities tracked by the Federal Reserve’s “Beige Book” are showing cooler economic activity.

Don’t sell the importance of manufacturing on the economy short. A recent Chinese study showed that 70% of that country’s impressive economic growth came from expansion in the manufacturing sector.

So when production grinds downward, make no mistake, it takes the economy down with it.

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